Bonds. Italian Bonds. And Why The World is Watching Them.

From left: German Chancellor Angela Merkel, France’s President Nicolas Sarkozy, and Italy’s Prime Minister Mario Monti These days, the ongoing European debt crisis has more twists and turns than a plate of spaghetti.

Several countries—Ireland, Portugal, Greece—have required financial bailouts, funded in part by the European Union. Now nervous eyes are trained on a far bigger player: Italy.

The Problem: Italy, the Eurozone’s third largest economy, has growing debts—$2.6 trillion and counting—and a shrinking economy. Fears are mounting that Italy’s debts may become too much for it to repay.

That’s got everyone watching Italy’s bond market. One way Italy (like the U.S. and its European peers) raises money is by selling bonds. But as Italy struggles, those bonds are looking riskier than ever. Higher risk means higher interest rates that Italy must pay.

The Catch-22? Rates may go so high that Italy can no longer afford to pay them. Right now they’re on the razor’s edge of affordability.